The Hard Truth: Even Liberals are Big Fans of Oil Subsidies

Survey Says…

If you were to survey people and ask the question “Should we subsidize oil companies?” — the overwhelming majority would undoubtedly respond “No!” The notion that we are subsidizing oil companies generates outrage in many people, but in this article I will show why these subsidies aren’t going to go away any time soon. The reason may surprise you.

I decided to write this article following a a recent discussion in a CleanTech discussion group on the social networking site LinkedIn. The person who started the discussion asked the question “Why is it so Hard to Kill Fossil-Fuel Subsidies?” The discussion was prompted by a recent article by environmental activist and author Bill McKibben called Payola for the Most Profitable Corporations in History. In the article McKibben proposes “five rules of the road that should be applied to the fossil-fuel industry.” But McKibben himself demonstrated in his article that he doesn’t really understand the nature of these subsidies — and this sort of misunderstanding largely explains why so many people are outraged that they persist.

So let’s take the original question on subsidies and ask it in a different way: “Should we allow oil companies to take a tax deduction also available to any U.S. manufacturer such as Apple or Microsoft?” A lot of people will still answer “No” to that question, but certainly fewer than answered “No” to the original question.

Now ask the question “Should farmers be allowed a fuel tax exemption for the fuel they use on the farm?” In this case, some people are going to say “No”, but farmers are going to be near unanimous in saying “Yes!”

Let’s ask one final question: “Should low-income families who struggle to pay their heating bills be helped with programs like the Low Income Home Energy Assistance Program (LIHEAP)?” The irony in this question is that some of the people who are the most vehemently opposed to fossil fuel subsidies will argue that this is an important program that helps keep poor people from freezing to death in winter, and thus it would be inhumane to eliminate it.

Yet unless you answered “No” to all four questions you support programs that have been identified as fossil fuel subsidies. Bill McKibben himself indicates sympathy for subsidies when he wrote: “Many of those subsidies, however, take the form of cheap, subsidized gas in petro-states, often with impoverished populations — as in Nigeria, where popular protests forced the government to back down on a decision to cut such subsidies earlier this year.” However, he then incorrectly asserts “In the U.S., though, they’re simply straightforward presents to rich companies, gifts from the 99% to the 1%.”

That’s just not true, and a failure to understand this is why there is so much outrage over fossil fuel subsidies in the U.S. (As an aside, characterizing the oil companies as “the 1%” is also misleading, because oil companies are overwhelmingly owned by the 99%). During the course of the LinkedIn discussion, a link was provided to Oil Change International, an organization devoted to pushing a transition away from fossil fuels. On their site they have a page on fossil fuel subsidies, which includes a link to a spreadsheet from the OECD breaking down various fossil fuel subsidies. The summary of oil-related subsidies for 2010 totals $4.5 billion. That is a number often thrown out there; $4 billion a year or so in support for those greedy oil companies.

But look at the breakdown. The single largest expenditure is just over $1 billion for the Strategic Petroleum Reserve, which is designed to protect the U.S. from oil shortages. The second largest category is just under $1 billion in tax exemptions for farm fuel. The justification for that tax exemption is that fuel taxes pay for roads, and the farm equipment that benefits from the tax exemption is technically not supposed to be using the roads. The third largest category? $570 million for the Low-Income Home Energy Assistance Program. (This program is classified as a petroleum subsidy because it artificially reduces the price of oil). Those three programs account for $2.5 billion a year in “oil subsidies.” So the next time you hear someone express outrage over oil company subsidies, you may want to ask them exactly which ones they are talking about.

Oil Subsidies that Liberals Love

So why do we still have fossil fuel subsidies? Because almost nobody — not even Bill McKibben — wants to get rid of all of the programs that are classified as fossil fuel subsidies. I suspect McKibben would not advocate eliminating the Low Income Home Energy Assistance Program. Two of the most outspoken Democratic opponents of oil subsidies have strongly defended this particular program — even though it has been identified by the OECD as the 3rd largest petroleum subsidy. When Republicans tried to cut funding for the program, Sen. Chuck Schumer, D-N.Y., called the proposal an “extreme idea” that would “set the country backwards.” Rep. Edward Markey, D-Mass, states on his website that he is a “longtime Congressional champion of providing assistance to low-income families to heat and cool their homes.”

In fact, look at the reaction from Democrats when President Obama tried to reduce funding for the program. Rep. Markey’s office said: “If these cuts are real, it would be a very disappointing development for millions of families still struggling through a harsh winter.” Sen. Jeanne Shaheen, D-N.H., noted her opposition: “The President’s reported proposal to drastically slash LIHEAP funds by more than half would have a severe impact on many of New Hampshire’s most vulnerable citizens and I strongly oppose it.” Sen. John Kerry, D-Mass., wrote a letter to President Obama that stated in part: “We simply cannot afford to cut LIHEAP funding during one of the most brutal winters in history. Families across Massachusetts, and the country, depend on these monies to heat their homes and survive the season.” Each one of these Democrats was defending a program that has been identified as a subsidy to Big Oil.

What is the Impact of Eliminating the Subsidy?

Of course there are other tax deductions that do more directly benefit the oil industry, just like every taxpayer has tax deductions that benefit them. Many of us take advantage of a mortgage interest deduction when we pay our taxes, but I bet most people would resent being told they are collecting subsidies just because they sliced a small portion off of their tax bill with that deduction.

Last year CNN did a story where they put together their own list of the so-called oil subsidies, and they wrote that the “largest single tax break” — amounting to $1.7 billion per year for the oil industry — is a manufacturer’s tax deduction that is defined in Section 199 of the IRS code. This is a tax credit designed to keep manufacturing in the U.S., but it isn’t limited to oil companies. It is a tax credit enjoyed by highly profitable companies like Microsoft and Apple, and even foreign companies that operate factories in the U.S. Further, the deduction for oil companies is already limited. Apple is able to take a 9% manufacturer’s tax deduction, but ExxonMobil is only allowed to take a 6% deduction.

We can certainly debate whether the manufacturer’s tax credit is a subsidy that should be eliminated. But it is important to be informed as we discuss the issue. We need to ask three questions: 1). What is the purpose of this “subsidy?”; 2). Is the tax credit working as intended?; and 3). What is the projected impact from eliminating it?

The intended purpose of course is to keep manufacturing in the U.S. It is really irrelevant how profitable Apple might be; if there is a compelling financial advantage for them to build a factory overseas they will do so. This tax credit provides incentive for them to keep manufacturing in the U.S.

Likewise, ExxonMobil has access to oil fields and refineries in many foreign countries. If they are comparing projects here and abroad, that tax credit will factor into their decision. Whether it is enough to push them one way or another is something I don’t know. There should be some independent analyses to examine the impact. Many opponents of subsidies imagine that the impact will merely be taxpayer savings as ExxonMobil loses out on this tax credit. But what if the impact is that we lose domestic jobs as ExxonMobil shifts operations out of the U.S. (something that tax credit was designed to prevent)? What if the impact is that we continue to use just as much oil, but more of it now comes from overseas because we placed our domestic producers at a competitive disadvantage? Have those who are calling for an end to this tax credit actually studied the issue?

The Three Pinocchios

A recent fact check in the Washington Post took President Obama and the Democratic National Committee to task for characterizing these sorts of tax deductions as subsidies:

We explained in a previous column that reasonable minds disagree about whether it is appropriate to use the term “subsidies” to describe what are really just oil industry tax breaks. That’s because the average person understands the term “subsidy” to mean actual cash investments, the likes of which the Obama administration has given to alternative energy companies like the now-bankrupt solar-panel manufacturer Solyndra.

Technically speaking, the government has allowed only tax deductions to help oil companies recover the cost of doing business — this is standard in virtually all industries. No money from the U.S. Treasury goes to the oil industry, so it’s a stretch to describe the tax breaks as literal handouts like Solyndra received. Admittedly, we’re talking about a semantics issue here. But we can’t understand why the DNC and Obama continue to use the word “subsidies” in such a questionable way, especially when the term “tax breaks” is more accurate and indisputably true.

The subsidy claim being pushed by President Obama and others (like Bill McKibben) received a Washington Post rating of Three Pinocchios, which represents “Significant factual error and/or obvious contradictions.”

Conclusions

If we are to have a productive discussion of fossil fuel subsidies, it is important that participants understand what they are, their intended purpose, and what the impact of removing them is projected to be (and projected means conducting an actual analysis). Because of misleading political rhetoric, people imagine these subsidies as cash payments to oil companies. But, these subsidies are not what people think they are, and in many cases they are benefiting people who have nothing to do with the oil industry.

That is why it is so hard to get rid of them; a majority of the population likely supports at least some of them. And until those who are loudly screaming that we must eliminate these subsidies actually take the time to understand what they are — as well as the impact of removing them — we can expect there will continue to be much heat and little light on this topic.

In addition to the $1.7 billion, most people think that the oil industry is just Exxon, Shell, BP, and Chevron. They don’t know about the many other companies they’ve never heard of that are also taking advantage of the tax credit. So they see this “subsidy” and figure Exxon is getting 1/4 of that figure, roughly $500 million. In reality, they are getting a lot less than that since all the other companies are also using the tax credit. This tax credit might be keeping some of these smaller companies around, and therefore keeping a few jobs here.

If I had more time today I would write something intelligent but I don’t. Our TAX CODE is totally screwed up.

While I am probably like some of the people who post here, I also uses the Tax Code to minimize the taxes I pay to the Federal Government and State agencies. However, they NEVER drop to zero or a NEGATIVE number and I always pay something. That is certainly not the case for some individuals and corporations which I believe is a fundamental flaw in our current tax code.

The internet has made it possible for ‘The People’ to learn that some individuals and corporations pay nothing while still others pay only a few percent. We set unrealistic and punitive tax rates and then publish hundreds of exceptions so that some individuals and corporations can take advantage of them.

We hear our government representatives talk about how difficult or impossible it is for them to separate out specific social programs of benefit to people living below the poverty level. On almost every front we seem to be building a society based on class warfare and greed instead of fairness. We provide incentives for certain types of fuels while penalizing others. We even seem unable to come up with policies to control the number of lobbyist who currently outnumber members of Congress.

You may want to read David Brooks’ column America is Europe. The bottom line: The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.

The column starts with this insight: We Americans cherish our myths.

Here’s a reality check: When you include both direct spending and tax expenditures, the U.S. has one of the biggest welfare states in the world.

Here’s a completely hypothetical example: Suppose the Pentagon wanted to buy a new fighter plane. But instead of writing a $10 billion check to the manufacturer, the government just issued a $10 billion “weapons supply tax credit.” The plane would still get made. The company would get its money through the tax credit. And politicians would get to brag that they had cut taxes and reduced the size of government!

As one of the people involved in the original Linkedin thread, I must say that Robert hit the nail on the head with the outrage over “subsidies” (my other favorite is the phrase “spending in the tax code”)

LIHEAP is a welfare program. It does not benefit the oil companies in any real way, since they don’t provide fuel if the customer does not pay.

Yet it is included in lists of oil company subsidies. I would argue that since it helps offset the cost of fuel then it does benefit oil companies because then people can afford more fuel. But most people aren’t thinking about things like this when they discuss oil subsidies — which is why I say they will persist. Nobody knows what they are, and when they find out they say “But we didn’t mean those subsidies.”

Oil companies, as opposed to natural gas and electric utilities, are minor beneficiaries of LIHEAP funding.

True, oil companies sell more heating oil because of the availability of LIHEAP funds, but they are not required to sell oil for which they will not be paid; and, they can remove oil from customer storage tanks if they are not paid. Utilities, which are not permitted to discontinue service to “payment-troubled customers”, benefit to a far greater extent. That is not to suggest that LIHEAP is a subsidy to utilities, but rather that it is partial compensation for the losses the utilities would otherwise incur because regulation prohibits them from discontinuing service for non-payment.

The choice of the term “subsidy” regarding LIHEAP is more pejorative than descriptive, by intent.

Quite obviously, I do. I suspect most energy company managements would agree.

Try ending LIHEAP and allowing utility companies to terminate service for non-payment.

Come back 1 year later and analyze who was disadvantaged by ending LIHEAP. You would not find the impact in the 10k reports of the energy companies. You would find it in the lives of “payment-troubled customers”.

LIHEAP is actually a lot of money – $2.9 billion in 2010 – http://www.oecd.org/site/tadffss/48786795.pdf. This money is coming from the tax-payer, ends up with the oil companies and is similar in size to the tax exemptions. Having a more equitable society would be better than always handing out benefits to the people at the bottom, while paper-shuffling investment bankers tax our investments and our cities to death with their death by a thousand cuts, and corporations dodge their responsibility to society while claiming “personhood”(!)..

NB Just because there are all sorts of tax exemptions running around for companies other than oil companies doesn’t mean that they don’t affect the fossil fuel market. They do.

Mac, you got to stop with your nonsensical posts or I’ll have to put a stop to it. I don’t like moderating comments, but you’ve been souring many productive discussions lately and I’ll do what I have to even if it’s not something I like to do.

A duplicitous argument, if I ever saw one. In my enviro-whacko circles, the attack of the fossil-fuel subsidy is an unfortunate but necessary response to fossil-fuel industry pressure to kill green energy and thwart global progress in the name of the simple greed of a select few and their manipulation of simpler folk. And our argument is far more reaching than the pitiful subsidies you emphasize. It’s trivial to construct an argument that hard energy (coal, oil, nuclear, gas) subsides over the last few hundreds of years would amount to trillions of inflation adjusted dollars. For example, railroads, war, highways, automobiles, aerospace, space, manhatten project, generic DoD, etc . Simply put, the energy industry simply would not exist without government funded demand, government granted land, and direct subsides. Cheap energy is the foundation of western civilization. The limits on existing fossil-fuel infrastructure have been basically clear since the 1950s. Yet attempts to overcome these limits by developing thermodynamically more efficient, simpler, cheaper, healthier, less environmentally destructive ’green’ ideas (and their relatively pathetic funding) are constantly under attack for a myriad of hypocritical and irrational reasons and anti-scientific, rhetorical arguments. It’s sick.

How so? I have shown specific examples of programs that have been classified as oil subsidies (in fact, directly linking from a page criticizing oil subsidies) and yet these are subsidies that are going to be popular among many people pushing to kill oil subsidies. There is nothing duplicitous about that; it just shows that people don’t really understand the nature of many of these subsidies.

the attack of the fossil-fuel subsidy is an unfortunate but necessary response to fossil-fuel industry pressure to kill green energy

Can you give some examples? Most of the fossil fuel companies I know are working on green energy.

It’s trivial to construct an argument that hard energy (coal, oil, nuclear, gas) subsides over the last few hundreds of years would amount to trillions of inflation adjusted dollars.

Maybe you did not understand the article. It did not make the argument that the oil industry hasn’t been heavily subsidized. So you are arguing a straw man. The article simply states that oil subsidies will continue to be with us because many of the people who are against them actually support programs that are identified as oil subsidies. As long as liberals support LIHEAP, they support what the OECD has identified as the 3rd largest oil subsidy. I don’t think that’s a controversial argument, unless you start to extrapolate beyond things I actually wrote.

That is an externalized cost, and again one that has very popular support. I mean, sure, people say they don’t like dumping CO2 in the atmosphere, but put a price on it and see how quickly they change their tune. Programs like LIHEAP and efforts to tap the SPR to reduce the price of gasoline only exacerbate this problem, and yet Ed Markey is leading the charge. It’s like there is a total disconnect in his head where the only oil subsidies that matter are tax breaks for the industry.

Raja, CO2 is not a pollutant in the normal sense, but it does lead to rising global temperatures. Rising CO2 levels are not the only things that affect global temperature, but they are driving the current increases. The evidence is clear and getting clearer.

Artificially cheap land leases for oil drilling is another of the subsidies you left out. The BLM just raised land rents for the first time since the 20s to something approximating the high rates being paid by the new solar developers – and the GOP had fits.

If Republicans would allow Democrats to retrofit low income homes and invest in a one time cost of solar panels (the sort of efficiency improvements now being funded by cap and trade funds in RGGI states) then Democrats would trade losing LIHEAP which costs over the long term more than switching to clean energy.

But the GOP haven’t come close to that, and with the lurch even further Right with the congress that was willing to go to the brink over a debt problem that never bothered them when it was rung up, that would be playing chicken.

So Democrats at least try to stop the worst of the immediate pain with LIHEAP funds. To blame them – as if that would be their first choice, to keep low income homes addicted to oil is just bizarre. It is the GOP that prevents us from fixing the problem. LIHEAP is the bandaid.

To blame them – as if that would be their first choice, to keep low income homes addicted to oil is just bizarre.

You are missing the point. LIHEAP does show up on lists of oil subsidies. That OECD list is cited all the time. Democrats support LIHEAP, and therefore they support exactly the sort of thing that they condemn. The problem is that too many people don’t actually know the types of things that are being called oil subsidies.

Artificially cheap land leases for oil drilling is another of the subsidies you left out.

BLM leases are awarded on the basis of bonus bids in auctions. The cost of the leases is determined by the highest bid, not by the BLM.

Perhaps you’re referring to royalties. If the BLM increases royalties, then the cash bonuses will likely drop. If a company is willing to bid $x on a BLM lease for a 12 1/2% royalty, and the BLM increases that royalty, then it makes sense that high bids will be something less than $x. I don’t think bidders will suddenly assume that a given lease is somehow more valuable, such that they’ll now decide to invest more, simply because someone has increased the royalty. There is no free inch, not even when oil companies decide what to pay for leases. Land access cost can come in many forms and combinations thereof: bonus bids, royalties, drilling obligations, work programs, partner payments, taxes, etc. To suggest that tweaking one of these components will magically increase the cost a company is willing to pay for reserves in the ground is to misunderstand the exploration process.

Additionally, this in my opinion is a false argument. Couldn’t we say that any industry is heavily subsidized, because it could be taxed more than it is, if only someone rewrote the tax code?

I have often wondered why supporters of renewable energy (of which I am one) waste so much time harping about fossil fuel subsidies and tax breaks. They always ignore the fact that on a cost per unit energy basis, the tax breaks are quite trivial.

They are not the reason fossil fuels cost less than renewables. Renewables will not suddenly become cost competitive if fossil fuels cost a few cents more per unit energy without tax breaks.

“They always ignore the fact that on a cost per unit energy basis, the tax breaks are quite trivial.”

The salient word is, “renewable”. A comparison on “a cost per unit energy” has little value when comparing an energy source that is extracted, consumed for perpetuity, and transformed into toxins; with an energy source that is renewable.

Taxes and subsidies should reflect the simple fact that extraction and consumption of limited and pernicious resources is more costly to today’s society as well as to tomorrow’s.

Folks of your ilk always seem to neglect to mention the vast benefits that come to us due to the “extraction and consumption of limited and pernicious resources”. The global human life expectancy has doubled over the last century due to the advancement of human freedom, capitalism, and technology. Our use of fossil fuels has advanced civilization and made the human race wealthier and healthier. Not only do you exhibit hypocrisy by taking full advantage of everything that is afforded us by cheap energy (you are, after all, reading this on a computer connected to the internet), but you display truly evil intent when you seek to prevent poverty-stricken third world citizens from accessing and using cheap fossil fuel energy to make their own lives healthier, longer, more productive, more meaningful. Do you really think they’d forgo escaping grinding poverty and debilitating diseases in order to keep the planet a fraction of a degree cooler? Do you, really?? And not only that, you have a serious totalitarian streak, as you certainly find palatable the use of force to prevent me and other responsible humans from responsibly exploiting fossil fuel resources. The vicious immorality of your ideas needs to be exposed and repudiated, you parasite.

When a reply commences with, “Folks of your ilk”, then words like, “evil” and ”parasite” are nearly guaranteed to soon follow. Congratulations on continuing the trend.

It is not the consumption of toxic fuels that is the problem. Rather, it is immoderate consumption that is the problem. I argue that your ”responsibly exploiting ” (now, there’s a revealing conflation of terms!) is actually highly irresponsible. Who are we to consume all the good stuff, and leave only the dregs to our descendants? Perhaps, they might be wiser?

If you insist on ad hominem attacks, then I can guarantee you that I consume less than you; and I live quite comfortably. By definition, a “parasite” is the creature that consumes the life of its host. Perhaps, you should research the idea of psychological projection.

“The global human life expectancy has doubled over the last century due to the advancement of human freedom, capitalism, and technology. ”

That’s a stretch. It could be more easily be argued that simple consumption has led to, or contributed to, recent increases in life expectancy. Also, it appears as if you believe that, despite apparent evidence, these trends can continue unabated. You’re not a very effective spokesperson for the status quo.

@EdNowak Name calling reveals your (minimal) level of intelligence and class.
Cheap energy had it’s time and place. That’s over. We know better now. While average life expectancy rates are up so is the cancer rate. If you factor in the cost of health care for people who are sick from the pollution generated by cheap oil is it still a great benefit.
When we power the world with solar energy and the cancer rate declines people will realize all they had to do was alter their thinking. You need to alter your way of thinking. BTW do you understand what the terms “renewable” and “sustainable” really imply-not just that we won’t run out but also that it won’t kill us.

Robert, you are correct. If the oil industry could wrap its greedy clutches to a greater degree around the solar PV industry it would already have done so. Consumer owned rooftop solar PV and FIT scares the hell out of them. Throw in the hundreds of models of electric cars and bikes hitting the market daily and they quiver a bit more. Nothing scarier than an entire nation riding on free sunshine (consumer owned).

They however, have the luxury of owning numerous congressman and news media execs. They will spin the future so any profits to be made luckily fall from heaven into their pockets.

Thank you, Robert, for another dispassionate and nuanced analysis. I am becoming increasingly frustrated with the “message” that Bill McKibben’s 350.org is promoting. McKibben promotes a type of “cheerleader activism” without providing substantive information or direction. The deluge of articles, Facebook posts, & tweets coming from 350.org about about rising CO2 levels is simply fiddling while Rome burns.

Now McKibben is calling the fossil fuel industry “Public Enemy #1.” It’s hard to imagine how “moral outrage” will promote a transition to a low-carbon economy, in the absence of good analysis and examples of concrete policy reform–both of which are missing from 350.org’s platform.